Assisted by Kristina Tato
A recent Supreme Court decision highlighted the importance for employers to pay terminated employees their full entitlements including payment in lieu of the notice period and any incentives/bonuses. The case hinged on whether the parties were bound by an old contract or whether the new contract which was unsigned applied which would determine the notice period owed to the employee.
Washington H Soul Pattinson & Company Limited ('WHSP') was ordered to pay $1.1 million in damages for terminating Melinda Roderick ('Roderick'), the company's executive director, without warning.
Roderick was employed between 2006 up until 12 April 2018 when she was terminated without notice. Initially employed as the Chief Financial Director, Roderick was then appointed as the Finance Director in 2014. Notably, Roderick was the only female on the board and was the second most senior employee.
Roderick's terms and conditions of employment were originally set out in the 2006 letter ("the original contract"). When Roderick became the Finance Director, a draft new employment contract was made in 2015 but was never signed.
WHSP paid in lieu of notice three months' salary in July 2018 as the original contract stipulated that three months' notice be given.
Roderick claimed damages including:
- payment of her salary in respect of the period of notice that she says should have been afforded to her, being 24 months;
- payment of an amount representing her alleged entitlements under a long term incentive plan; and,
- payment of an amount representing her alleged entitlements under a short-term incentive scheme.
The key issues surrounding this case included:
- whether the original 2006 contract containing the express term of three months' notice applies;
- where the new unsigned contract applied, what is the implied period of notice;
- the notice period Roderick should have been given and determining what her entitlements are including any short term and long-term incentives; and,
- the reason for termination.
Original Contract v Unsigned Contract
WHSP argued that they were bound by the original contract. Roderick submits that when she became the Finance Director, the original contract was discharged. The Court noted that there was a significant change in her role in that the original contract could not have appropriately been applied in the circumstances especially where the original contract did not contain a term specifying that it would remain in force even if the duties are altered. Roderick's responsibilities significantly increased in which she became director of 12 companies.
Despite the contract being unsigned, the Court found that the intention was for her previous contract to be discharged and for the parties to be bound by the new contract. Therefore, the terms and conditions of the unsigned contract applies.
Implied Notice and Bonus
WHSP argued that they are bound by the original contract which contained an express term that there be a three-month notice period. As they did not give three months' notice as per the original contract, WHSP subsequently paid an amount in lieu for the three months and therefore argued they were not in breach.
As the court established that the original contract no longer applied, the court had to assess what the implied reasonable notice term should be. The Supreme Court saw Roderick being entitled to 12 months' notice.
WHSP also argued it was not obliged to pay discretionary incentives given that Roderick was terminated for poor performance and did not work the full year. WHSP submitted that she was terminated prior to the assessment of these benefits under these schemes.
Roderick argued that the term in the new contract should entitle her to the incentives she would have received including short term incentives. WHSP denied having any contractual obligation to pay Roderick a short-term incentive submitting that it is discretionary and dependent on performance. WHSP submitted that it is not obliged to pay the short-term incentive based on performance where Roderick is no longer employed.
The Court stated that any "decision as to payment is only discretionary in the sense of assessing [Roderick's] performance against the KPIs" and there is an implied contractual obligation to "exercise any discretion conformably with the purpose of the scheme and not to choose arbitrarily or capriciously or unreasonably to not pay money, irrespective of whether the agreed parameters had been achieved". The argument to not pay Roderick as the employment ended "only a matter of days before the end of the relevant financial year would be quite unreasonable and arbitrary".
Reason for termination
The termination letter outlined that the reason for dismissal was that Roderick was "not the right fit". Roderick argued that she was terminated without explanation. WHSP subsequently submitted that Roderick was terminated for poor performance.
The Court noted that it was a "curious feature" that there was not a single document noting an issue with Roderick's performance including the termination letter itself. It did not accept that Roderick performed poorly but "that it could do better in terms of value for its money" given also, that a day after terminating Roderick, WHSP hired a new CFO on a lower salary. Further, the new CFO had no position on the board and reported to the chief executive which the court noted "would have saved [WHSP] a considerable sum".
To assess the damages, the court noted that the correct approach would be to consider the notice period Roderick should have been given and then "assess loss based on the salary that would have been paid during that period as well as assess any non-fixed entitlements based on the loss of an opportunity to obtain a commercial benefit".
The Supreme Court concluded that the contract had been repudiated by the employer. Roderick was entitled to damages and WHSP ordered to pay $568,180 for the remaining notice period, $318,560 for the short-term incentive and $218,590 for the long term incentive.
The full decision can be found here.
It is important that employers pay any employees that have been dismissed their full entitlements including any payment in lieu of the notice period and incentives. In situations where there is a more recent unsigned contract, the court will look into the intention of the parties to be bound by that contract as well as alteration of responsibilities and duties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.